U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities
Exchange act of 1934
For the quarterly period ended January 31, 1999
__ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from_______________to______________
Commission file number Securities Act Registration No. 33-75276
OMNI Rail Products, Inc.
------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 68-0281098
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification NO.)
Incorporation or Organization)
975 SE Sandy Blvd. Portland, Oregon 97214
-----------------------------------------
(Address of Principal Executive Offices)
(503)230-8034
-------------
(Issuer's Telephone Number, Including Area Code)
Creative Medical Development, Inc.
----------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 5,109,152 Common Shares and
586,859 Series B Preferred Shares all at $.01 par value were outstanding as of
January 31, 1999
<PAGE>
OMNI RAIL PRODUCTS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
INDEX
PART I. FINANCIAL
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets....................1
Unaudited Condensed Consolidated Statements of Operations..........2
Unaudited Condensed Consolidated Statements of Cash Flows..........3
Notes to Unaudited Condensed Consolidated Financial
Statements.........................................................4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................8
PART II. OTHER INFORMATION....................................................12
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES....................................................................14
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OMNI RAIL PRODUCTS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
January 31, 1999 April 30,
(Unaudited) 1998
----------- -----------
Current Assets:
Cash $ 284,117 $ 393,877
Accounts receivable, net 873,128 1,853,280
Inventories, net 1,127,833 1,423,800
Prepaid expenses and deposits 83,665 52,158
----------- -----------
Total current assets 2,368,743 3,723,115
Real estate held for sale 1,400,000 1,618,275
Property, plant and equipment, net 1,780,250 2,272,214
----------- -----------
$ 5,548,993 $ 7,613,604
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Accounts Payable $ 1,512,324 $ 1,884,679
Accrued Liabilities 737,125 1,459,092
Notes Payable 1,529,903 3,305,283
Current portion of long-term debt 1,410,136 2,136,376
----------- -----------
5,189,488 8,785,430
Long-term debt, less current portion 1,364,630 522,342
Stockholders' deficit:
Common Stock 51,093 55,246
Preferred stock 5,869 6,221
Additional paid in capital 2,331,906 2,413,651
Retained earnings (deficit) (3,393,993) (4,169,286)
----------- -----------
Total stockholders' deficit (1,005,125) (1,694,168)
----------- -----------
$ 5,548,993 $ 7,613,604
=========== ===========
1
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<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Nine Months Ended
-------------------------------- --------------------------------
January 31 January 31 January 31 January 31
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 2,276,761 $ 3,769,467 $ 9,101,868 $ 12,358,474
Cost of sales 1,706,252 2,948,516 6,719,839 9,508,258
------------ ------------ ------------ ------------
Gross profit 570,509 820,951 2,382,029 2,850,216
Selling expenses 197,341 412,093 729,513 1,218,117
General & Administrative expenses 229,108 408,641 779,258 1,117,768
Research and development 25,907 32,909 99,084 96,504
------------ ------------ ------------ ------------
452,356 853,643 1,607,855 2,432,389
Earnings (loss) from operations 118,153 (32,692) 774,174 417,827
Other income (expense):
Interest expense (68,328) (185,776) (309,683) (513,594)
Gain on asset disposal 157,899 19,951 156,842 26,533
Miscellaneous income (expense) 110,080 (23,021) 153,960 (93,661)
------------ ------------ ------------ ------------
Total other income (expense) 199,651 (188,846) 1,119 (580,722)
Earnings (loss) before
income taxes 317,804 (221,538) 775,293 (162,895)
Income taxes -- -- -- 1,894
------------ ------------ ------------ ------------
Net earnings (loss) $ 317,804 $ (221,538) $ 775,293 $ (164,789)
============ ============ ============ ============
Basic earnings ( loss) per share $ 0.19 $ (0.12) $ 0.44 $ (0.09)
============ ============ ============ ============
Diluted earnings per share $ 0.15 $ (0.12) $ 0.41 $ (0.09)
============ ============ ============ ============
Weighted average basic common
shares outstanding 1,703,051 1,843,521 1,745,927 1,846,162
Weighted average diluted
common share outstanding 2,185,801 1,843,521 1,906,844 1,846,162
</TABLE>
2
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<TABLE>
<CAPTION>
OMNI RAIL PRODUCTS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
Nine Months Nine Months
Ended Ended
January 31 January 31
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Earnings (loss) $ 775,294 $ (164,789)
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 120,542 257,257
Amortization -- 89,233
Gain on asset disposal (156,842) (26,533)
Changes in:
Accounts receivable 980,152 179,490
Inventories 295,967 106,931
Prepaid expenses and deposits (31,507) (72,940)
Accounts payable (372,355) (60,545)
Accrued liabilities (721,967) (104,881)
Deferred gain -- 70,760
----------- -----------
Net cash provided by operating activities 889,284 300,516
Cash Flow from Investing Activities
Proceeds from sale of plant, property & equipment 825,778 380,471
Purchase of plant, property & equipment (79,240) (172,777)
Proceeds from sale of investment securities -- 755,123
----------- -----------
Net cash provided by investing activities 746,538 962,817
Cash Flows from Financing Activities
Common stock redemption (18,752) (25,002)
Proceeds from Subordinated Convertible debt 275,160 --
Net payments on notes payable (2,001,990) (351,964)
Net payments on long term debt -- (1,032,692)
----------- -----------
Net cash used by financing activities (1,745,582) (1,409,658)
----------- -----------
Net decrease in cash and cash equivalents (109,760) (146,325)
Cash and cash equivalents at beginning of period 393,877 139,636
----------- -----------
Cash and Cash equivalents at end of period $ 284,117 $ (6,690)
=========== ===========
Supplemental schedule of non-cash financing activities
Exchange of 64,192 common shares for debt $ 67,500 --
Conversion of unsecured current debt to long-term 487,859 --
</TABLE>
3
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OMNI RAIL PRODUCTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL INFORMATION
The Company, pursuant to the rules and regulations of the Securities and
Exchange Commission, has prepared the accompanying unaudited consolidated
financial statements of OMNI Rail Products, Inc. Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to such rules and regulations. In the opinion of
Management, the condensed consolidated financial statements include all
adjustments necessary in order to make the consolidated financial
statements not misleading. Results for the interim period ended January 31,
1999 are not necessarily indicative of the results that may be expected for
the fiscal year ending April 30, 1999. For further information, refer to
the condensed consolidated financial statements and footnotes thereto, for
the fiscal year ended April 30, 1998, included in the Company's Form
10-KSB.
(2) DESCRIPTION OF THE COMPANY, BASIS OF PRESENTATION AND CHANGE IN REPORTING
ENTITY
Creative Medical Development, Inc. (CMD), nka OMNI Rail Products, Inc.,
incorporated in California on July 20, 1992, and reincorporated in Delaware
on June 1, 1993, designed, developed, manufactured and marketed propriety
ambulatory infusion therapy products for alternate site patient care. On
September 13, 1995, CMD sold substantially all of its operating assets and
technology and until May 1, 1997, did not have significant operating
results.
Effective April 30, 1997, CMD and OMNI International Rail Products, Inc.
(OMNI), completed an agreement and plan of merger which provided for the
merger of OMNI with and into a wholly-owned subsidiary of CMD
(collectively, the Company). Upon consummation of the merger, OMNI's name
changed to OMNI Products, Inc. Just prior to the closing of the merger,
OMNI and CMD each completed a recapitalization under approval of each
company's Board of Directors.
Under the terms of the merger agreement, the shareholders and stock option
holders of OMNI exchanged all of their common stock and common stock
options for common stock and Series B preferred stock and common and
preferred stock options ("Substitute Options") of the Company. OMNI's
common stock and common stock options were converted into CMD common stock
and common stock options at a ratio of 3.091 to 1.0. In addition, OMNI
shareholders and stock option holders received shares of Series B preferred
stock and options to purchase Series B preferred stock, respectively.
4
<PAGE>
Upon completion of the transaction, former OMNI security holders owned
approximately 67% of the total outstanding shares of the Company on a fully
diluted basis. Ten percent of the Company's shares given in the transaction
were placed in escrow ("Escrow Shares") pending final valuation and
settlement. The final ownership ratio was adjusted pursuant to the Merger
Agreement to reflect differences that resulted from changes in assets of
both companies between the date of acquisition and the settlement date of
April 30, 1998. The determination of final asset values was not resolved
until August 1, 1998, at which time the Escrow Shares were canceled to
reflect the final ownership ratio. In addition, the Substitute Options were
adjusted down by 10%.
As a result of the adjustments under the Merger Agreement and reduction of
stock options held by the Company's former CEO, discussed in Note (3)
below, the ratio of the Company's outstanding stock held by the former OMNI
shareholders, assuming exercise of all the Substitute Options and exercise
of all options and warrants of the Company outstanding at the time of the
merger which were exercisable at $1.00 or less, was reduced from
approximately 67% to approximately 61%. As of the first quarter ended July
31, 1998, prior to the adjustments, there were 5,442,596 shares of common
stock and 622,065 shares of Series B Preferred stock outstanding.
The transaction between CMD and OMNI is considered a reverse acquisition
for financial reporting purposes and has been accounted for under the
purchase method of accounting. As a result, for financial statement
purposes, i) the historical values of OMNI's net assets have been retained;
ii) the net assets of CMD immediately prior to the merger have been
recorded at their fair value on the date of the transaction, iii) the
results of operations of CMD are included in the results of the Company
beginning on the effective date of the transaction, iv) the dollar balance
of OMNI's accumulated deficit has been retained, and the balance of OMNI's
common stock and additional paid-in capital have been reallocated to be
consistent with the ratio of CMD's preferred and common stock. Assets
acquired consisted of investment securities and a building, while
liabilities assumed consisted of the mortgage associated with the building
acquired. The fair value of assets acquired exceeded the fair value of
liabilities assumed by approximately $1,025,000; such excess was attributed
to the shares issued in the merger. OMNI's costs associated with the
transaction, totaling approximately $185,000, were also attributed to the
shares issued in the merger.
(3) COMPANY RESTRUCTURING
During Fiscal 1998, the Company began a restructuring plan to reduce the
over-capacity in its recycled rubber manufacturing operations and to
increase its concrete and virgin rubber production capabilities. The
refocus of business stems from changes in industry demand away from
recycled rubber products and more toward concrete and virgin rubber
crossing materials. The Company has ceased production of recycled rubber at
its Portland, Oregon, and Lancaster, Pennsylvania, plants and has
liquidated all of its related real estate, and almost all of its recycled
rubber manufacturing equipment at both locations. Some equipment, primarily
concrete forms, were transferred to the Company's remaining facilities. At
the same time the Company has extended an agreement with a pre-cast
concrete company to produce the Company's proprietary concrete and rubber
grade crossings.
5
<PAGE>
The Company, in conjunction with its restructuring, recorded certain
charges as of fiscal year ended April 30, 1998. These included a write down
of assets to be liquidated, a write-off of excess and obsolete recycled
rubber inventory and accrual of expected shutdown and liquidation costs.
The asset write-down and inventory write-off did not have an impact on the
Company's liquidity. Other charges were recorded as liabilities and are
being paid out during fiscal year 1999. All of the accrual made at fiscal
year ended 1998 had been applied to disbursements of the Company as of the
second quarter ended October 31, 1998.
The Company entered into an agreement with its former CEO, Michael L.
DeBonney, for his resignation as an officer and director of the Company
effective April 30, 1998, and full settlement of any claims against the
Company in connection with his employment as an officer of the Company. The
agreement continues in effect certain provisions of the employment
agreement related to noncompetition, restricted use of proprietary
information and confidentiality. Also, pursuant to the terms of his
severance agreement, Mr. DeBonny has relinquished options for 556,330
common shares and 56,835 Series B preferred shares.
(4) DEBT
During the 1999 fiscal first quarter, the Company entered into a
Forbearance Agreement with its Senior lender Finova Capital Corporation,
("Finova") that defers Finova from taking any action against the Company by
reason of any existing defaults. In addition, under the terms of the
Forbearance Agreement, the Company is permitted an Overadvance of up to
$400,000 beyond the normal terms of the line of credit. The Forbearance
Agreement also eliminates the monthly principal payment requirements on
Finova's term debt, and subjects the Company to additional covenants that,
among other things, requires the Company to raise an additional $250,000 in
equity capital or subordinated debt, requires the disposal of certain
assets (proceeds must go to pay down various loans with Finova) and
requires the Company meet certain projected financial goals.
At the end of October, the Company and Finova amended the Forbearance
Agreement reducing the subordinated debt financing requirements to two
tranches of $61,290. The first tranche was invested in November and the
second in December, 1998, making available half, or $200,000 of the
Overadvance facility. The Amendment also extended payoff of the Term Debt
owed by the Company to Finova. At the end of January 1999, the Company
raised an additional $152,580 of convertible subordinated debt financing
increasing the Overadvance borrowing limit from Finova to the full
$400,000.
At the end of January 1999, the Company owed two lenders approximately
$1,400,000 on notes secured by first mortgages on the Company's owned
facilities. Both notes were originally due in December 1998. The Company
negotiated extensions of these notes for periods of six and twelve months.
6
<PAGE>
All current terms of the notes remain in effect including monthly
installment payments. On November 30, 1998, the Company completed the sale
of its Lancaster, Pennsylvania Facility generating a pretax gain of
approximately $153,000. Net proceeds from the sale of approximately
$605,000 were used to reduce the mortgage notes payable. The Company also
completed a termination of its lease obligation for its former Portland
Oregon manufacturing facility. As part of the agreement the Company agreed
to make 42 equal monthly installment payments of $1,007 to the landlord and
entered into a month to month sublease for a small side building on the
property. As a result of the early termination of the lease the Company
recorded a $105,000 gain from elimination of accrued future lease payment
commitment.
As part of the Forbearance Agreement, and as part of the Company's
restructuring plan, the Company entered into Modification Agreements and,
in some cases, Subordination and Standstill Agreements with certain
unsecured creditors. These agreements place each creditor into a
subordinate position with Finova and extend payoff of any obligation over a
five-year period. In some cases the Modification Agreements defer payment
of current and future accruals on certain royalty and services fees.
(5) BASIC AND DILUTED NET EARNINGS PER COMMON SHARE
The calculation of diluted earnings (loss) per share excludes any
potentially dilutive shares in fiscal 1998 as such shares would have an
antidilutive effect.
Basic and weighted average EPS calculations for fiscal 1998 and 1999 are
adjusted for a one for three reverse split approved by the Company's
shareholders at the annual shareholders' meeting held in February 1999.
7
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations Background
- --------------------------------------------------------------------------------
OMNI Rail Products (previously known as Creative Medical Development, Inc., the
"Company") was incorporated in the state of California on July 20, 1992, and
reincorporated in the state of Delaware on June 1, 1993. The Company designed,
developed, manufactured and marketed ambulatory infusion therapy products under
the "EZ Flow" trade name.
On September 13, 1995, the Company entered into an Asset Purchase Agreement with
Gish Biomedical, Inc. ("Gish") for sale of the EZ Flow Pump technology and
product line. Under its terms, substantially all of the Company's manufacturing
related assets (with a net book value of $680,957) were sold for $600,000 cash
and $2,000,000 of Gish Stock (240,240 shares). Pursuant to the terms of the
agreement, operation of the EZ Flow business was transferred to Gish as of
September 13, 1995, and the sale closed April 17, 1996.
On April 17, 1997, the Company entered into an agreement for merger and
reorganization with OMNI International Rail Products, Inc., ("OMNI") a privately
held company in the business of manufacturing and distributing premium rail
crossing surface products in the United States and internationally. The
agreement provided for the merger of OMNI with a wholly owned subsidiary of the
Company formed for purposes of the transaction. The final ownership ratio, after
valuation adjustment completed on August 1, 1998, gave 61% ownership in the
Company to the former OMNI shareholders.
OMNI was an Oregon corporation formed in 1994 to acquire the OMNI premium
crossing business from Reidel Environmental Technologies, Inc. That business was
operated by OMNI until the merger with the Company and its operations continue
under the Company's wholly owned subsidiary corporation OMNI Products, Inc. At
the time of the merger, the OMNI executive officers became the executive
officers of the Company and the subsidiary and all but one of the OMNI directors
became directors of the Company and the subsidiary.
The Company's transaction with OMNI closed April 30, 1997. Subsequently, the
Company changed its fiscal year to April 30 consistent with OMNI's fiscal year
to facilitate accounting and reporting financial results.
Results of Operations
- ---------------------
The following Selected Financial Data for the periods ended January 31, 1999 and
1998 have been derived from the unaudited financial statements of the Company.
This Selected Financial Data should be read in conjunction with, and is
qualified in its entirety by reference to, the financial statements and related
notes thereto included elsewhere in this Report.
Except for the historical information contained herein, the matters set forth in
this Report include forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially. These risks and uncertainties are
detailed throughout this Report and are discussed from time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
The forward-looking statements included in this Report speak only as of the date
hereof.
8
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Results of Operations -- Quarter and nine months ended January 31, 1999
compared with the quarter and nine months ended January 31, 1998:
Quarters Ended Nine Months Ended
-------------------- ---------------------
January 31, January 31,
1999 1998 1999 1998
---- ---- ---- ----
Revenue 2,276,761 3,769,467 9,101,868 12,358,474
Gross Profit 25.1% 21.8% 26.2% 23.1%
Earnings (loss) from Operations 5.2% (0.9%) 8.5% 3.4%
Net earnings (loss) 14.0% (5.9%) 8.5% (1.3%)
Basic earnings (loss) per share $0.19 ($0.12) $0.44 ($0.09)
Diluted earnings (loss) per share $0.15 ($0.12) $0.41 ($0.09)
REVENUE
The Company derives its revenues from sales of both virgin rubber and concrete
and rubber premium highway-rail grade crossings to railroads, general
contractors and municipalities. Revenues for the quarter ended January 31, 1999,
decreased from the same quarter last year by $1,492,706 or a decrease of 39.6%.
The reduction in sales is mainly attributed to a change in sales mix and
elimination of all recycled rubber products in the current year. Total concrete
crossing sales declined by $1,329,621 or 67.8% over the same period last year,
while virgin rubber crossing sales increased slightly by $55,798 or 3.5%.
Declines in the concrete products area was mainly the result of lower demand by
the Company's major railroad customers. At the same time sales of recycled
rubber products accounted for $224,548 of third quarter sales last year, where
no recycled rubber sales occurred in the third quarter of fiscal 1999. For the
nine-month period, sales decreased $3,256,606 or 26.4% over last year with most
of the decline coming in the second and third quarters. Again, the Company's
lower current year sales are due to a change in the mix of product sold and from
eliminating sales of recycled rubber product (recycled rubber sales were
$1,782,640 lower for the first nine months of fiscal 1999 versus fiscal 1998).
The Company has now liquidated almost all of its recycled rubber product line
and closed two recycled rubber operations. The Company has increased its
concrete production capacity by refocusing its production to this part of the
premium grade crossing market. Virgin rubber products are produced at the
Company's processing facility in McHenry, Illinois, and are also purchased
through an out source provider of virgin rubber product.
COST OF SALES & GROSS MARGIN
Cost of sales decreased from $2,948,516 in the quarter ended January 31, 1998,
to $1,706,252 in the quarter ended January 31, 1999, or a decrease of 42.1%. The
greatest part of this decrease is directly related to lower sales. At the same
9
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time part of the decrease is due to operating efficiencies achieved by the
Company in realigning its operations and products and from higher profit margin
from the Company's current product line. Cost of sales for the nine months ended
January 31, 1999 declined by $2,788,419 or 29.3% with most of the decline
occurring in the second quarter.
Gross margins improved in the third quarter of fiscal 1999 to 25.1% compared to
21.8% last year. Much of the improvement came from elimination of low profit
margin recycled rubber products, increased sales of higher margin virgin rubber
products, and from a reduction of indirect overhead costs associated with the
shut down of the various recycled rubber facilities.
SELLING EXPENSES
Selling expenses for the quarter ended January 31, 1999, were $197,341 (8.7% of
sales) compared to $412,093 (10.9% of sales) for the quarter ended January 31,
1998. For the nine months, selling expenses were $729,513 (8.0% of sales)
compared to the prior year's same period selling costs of $1,218,117 (9.9% of
sales). Lower selling expenses are due to overall reduced selling costs as a
result of eliminating two sales offices, eliminating several positions within
the sales department and establishing a lower commission rate structure.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter ended January 31, 1999,
decreased to $229,108 representing a 43.9% decline over the same quarter last
year. For the first nine months of fiscal 1999 general and administrative
expenses were $779,258 (8.6% of sales) compared to $1,117,768 (9.0%) in fiscal
1998, or a 30.3% decline. General and administrative salaries were dramatically
reduced with the termination of the Company's Chief Executive Officer and Vice
President of Operations and with the resignation of its Chief Financial Officer,
as well as the elimination of several other positions. Consulting fees paid for
the Company's interim Chief Executive and Chief Financial Officers offset some
of these savings during the period. In addition, new management has reduced
other operating expenses as part of the Company's overall restructuring.
INTEREST EXPENSE
Interest expense for the quarter ended January 31, 1999, was $68,328 as compared
to $185,776 for the quarter ended January 31, 1998, a 63.2% reduction. The
decrease reflects the Company's continued repayment of mortgage and term debt
through sale of the Company's Lancaster facility; sales of recycled rubber
manufacturing equipment and lower borrowing on the Company's revolving line of
credit. Credit line borrowings were above the maximum amount allowable during
fiscal 1998, while the Company has maintained borrowings well below the maximum
borrowing limit during fiscal 1999. Interest rates were also reduced on certain
unsecured borrowings as part of the Company's modification of various debt
agreements (done in conjunction with the Finova Forbearance Agreement).
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company had a cash balance of $284,117. The Company's
operating activities generated cash of $889,284 during the first nine months of
fiscal 1999. Most of these proceeds came from operating income and from better
management of the Company's working capital.
The Company's net working capital deficit at January 31, 1999, amounted to
$2,820,745 (an improvement over the beginning of fiscal 1999 by approximately
$2,241,000). The Company's current debt maturities and other short-term
commitments exceed the Company's liquid assets available to pay such
obligations. This includes two mortgages originally due in December 1998. One
note was extended for an additional six months, and the other was substantially
reduced by proceeds from sale of the Company's Lancaster, Pennsylvania facility
and subsequently extended for 12 months. The Company is actively trying to sell
its remaining properties that secure these mortgages.
During the first quarter of fiscal 1999 the Company entered into a Forbearance
Agreement with its Senior Lender, Finova, that defers Finova taking any action
against the Company by reason of the existing defaults. In addition, under the
terms of the Forbearance Agreement, the Company is permitted an Overadvance of
up to $400,000 beyond the normal terms of the line of credit. The Forbearance
Agreement also eliminates the monthly principal payment requirements on Finova's
term debt. The Company has complied with all provisions and covenants
established in the Forbearance Agreement, as amended, including raising
subordinated debt, disposing of certain assets (proceeds went toward paying down
various loans with Finova) and meeting certain projected financial goals.
Through the end of the fiscal third quarter the Company had raised $275,160 of
subordinated debt thus making available the entire $400,000 Overadvance.
The Company's capital expenditures for the nine months were $79,240. The Company
has liquidated almost all of its recycled rubber production manufacturing
assets, and its real estate in Lancaster Pennsylvania. Sales of these assets
generated $825,778 of proceeds during the first nine months of fiscal 1999.
Further liquidation of assets could generate up to an estimated $1,500,000 in
gross proceeds during the remainder of fiscal 1999. Proceeds from these sales
must be used to payoff the Company's mortgage obligations that come due during
the next twelve months.
The Company's primary source of funds is from its operations. The Company is
restricted as to the amount it can borrow from Finova based on a percent of
eligible accounts receivable and inventory. Additionally, the Company likely
will need replacement debt or equity financing after the end of the Finova
agreement on August 31, 1999. The Company's debt will require restructuring or
additional financing must be found in the event sufficient funds are not
available to payoff certain debt that comes due during fiscal 2000. There can be
no assurance the Company will be able to complete the real estate and equipment
sales noted above prior to the mortgage maturity dates, nor can there be any
assurance that the Company will be able to arrange new financing or pay existing
debt once these amounts come due.
The Company's stock is traded on the OTC Electronic Bulletin Board under the
ticker symbol ORXR.
11
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OTHER INFORMATION - PART II
Item 1. Legal Proceedings
- -------------------------
On January 9, 1999, Edward George Goebel and Kathy Goebel, ("Plaintiffs")
filed suit against the company, and others, in the Third Judicial District
Court, Salt Lake County, Utah. Plaintiffs allege that Edward George Goebel,
suffered injuries when he fell off his bicycle while traveling over a
railroad crossing containing material produced in part by Reidel
Environmental Technologies, Inc., the predecessor in interest to OMNI
International Rail Products, Inc. The Plaintiffs have not yet specified
their damages in the suit. The case is not currently scheduled for trial.
The Company denies the Plaintiffs' allegations and is vigorously defending
the case.
The Company's insurance carrier is defending the claim under a reservation
of its rights to dispute its legal obligation to defend the claim and/or
pay any adverse judgment. The Company could be materially affected if the
plaintiffs receive an award against the Company which exceeds its insurance
coverage or if the insurance carrier is not liable to pay such award,.
Item 2. Changes in Securities
- -----------------------------
Not applicable
Item 3. Defaults on Senior Securities
- -------------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Annual meeting of the Company's shareholders was held on February
23, 1999. The following three directors were elected at the meeting (all
were directors prior to the meeting):
William E. Cook
Edward S. Smith
John E. Hart
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected
and qualified.
Shareholders were also asked to approve a change of the Company's name to
OMNI Rail Products, Inc. Shares voting for were 3,309,356 and against were
0. Shareholders also voted to approve a reverse split of the Company's
outstanding securities on a ratio of one share for every three shares
outstanding. Shares voting for were 3,188,754 and against were 120,602.
12
<PAGE>
Item 5. Other Information
- -------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
10.16 Eight Percent Secured Convertible Subordinated Note
Agreements ("Subordinated Notes") between the Company and
Richard A Kreitzberg.
10.17 Eight Percent Secured Convertible Subordinated Note
Agreements ("Subordinated Notes") between the Company and
Edward S. Smith, a member of the Company's board of
directors.
10.18 Registration Rights Agreement, establishing Note Holder's
rights and Company requirements for registration of shares
issued upon conversion of the Subordinated Note.
10.19 Subordinated Security Agreement granting Richard A.
Kreitzberg and Edward S. Smith a security interest in all
assets of the Company, subordinated to certain Senior
lenders.
10.20 Addendum to Subordinated Security Agreement, between the
Company and William E. Cook.
10.21 Addendum to Eight Percent Secured Convertible Subordinated
Note, between the Company and William E. Cook.
27 Financial Data Schedule January 31, 1999.
(b) Reports on Form 8-K
-------------------
None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OMNI Rail Products, Inc.
- ------------------------
Registrant
March 16, 1999 /s/ Robert E. Tuzik
- -------------- -----------------------------------
Date Robert E. Tuzik
Chief Operating Officer
March 16, 1999 /s/ M. Charles Van Rossen
- -------------- -----------------------------------
Date M. Charles Van Rossen
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
10.16 Eight Percent Secured Convertible Subordinated Note Agreements
("Subordinated Notes") between the Company and Richard A Kreitzberg.
10.17 Eight Percent Secured Convertible Subordinated Note Agreements
("Subordinated Notes") between the Company and Edward S. Smith.
10.18 Registration Rights Agreement, establishing Note Holder's rights and
Company requirements for registration of shares issued upon conversion
of the Subordinated Note.
10.19 Subordinated Security Agreement granting Richard A. Kreitzberg and
Edward S. Smith a security interest in all assets of the Company,
subordinated to certain Senior lenders.
10.20 Addendum to Subordinated Security Agreement, between the Company and
William E. Cook.
10.21 Addendum to Eight Percent Secured Convertible Subordinated Note,
between the Company and William E. Cook.
27 Financial Data Schedule January 31, 1999.
SCHEDULE TO EXHIBITS
- --------------------
Exhibit 10.18 is filed for two identical agreements that differ only with
respect to the names of the Note Holders to the agreements, with such Note
Holders being Edward S. Smith and Richard A Kreitzberg.
Exhibit 10.19 is filed for two identical agreements that differ only with
respect to the names of the Secured Parties to the agreements, with such Secured
Parties being Edward S. Smith and Richard A Kreitzberg.
15
EXHIBIT 10.16
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS NOTE IS SUBORDINATED TO THE LOAN OBLIGATIONS DUE TO FINOVA CAPITAL
CORPORATION PURSUANT TO A SUBORDINATION AND STANDSTILL AGREEMENT EXECUTED AND
DELIVERED BY LENDER.
CREATIVE MEDICAL DEVELOPMENT, INC.
Eight Percent Secured Convertible Subordinated Note
Due January 22, 2004
CREATIVE MEDICAL DEVELOPMENT, INC., hereinafter referred to as the
"Company," for value received, hereby promises to pay to Richard A. Kreitzberg
("Lender"), at 3332 El Dorado LP. S., Salem, Oregon 97302, or such other place
as the holder ofthis Note may designate in writing from time to time, in lawful
money of the United States of America the principal sum of One Hundred
Twenty-Two Thousand Five Hundred Eighty Dollars ($122,580.00), together with
interest on the outstanding principal balance at the rate of eight percent (8%)
per annum.
1. Payments. Company shall pay to Lender monthly payments of interest
beginning on February 22, 1999 and continuing on the 22nd day of each month
thereafter until the principal balance has been either paid in full or converted
to Common Stock and Series B Preferred Stock pursuant to Section 4 hereof Except
as otherwise set forth herein, the entire principal balance is due and payable
on January 22, 2004. Company shall have no right to prepay this Note unless
Lender in its sole discretion consents thereto or, on or after the third
anniversary of this Note, Company has given Lender written notice of its intent
to prepay all or any portion of the principal balance of this Note which has not
been converted pursuant to Section 4 of this Note at least sixty (60) days prior
to the prepayment. If Lender notifies Company in writing at least sixty (60)
days prior to the second anniversary of this Note of the exercise of this option
to accelerate repayment of this Note, Company shall pay to Lender the principal
and interest due under this Note, amortized over a one year period, in twelve
(12) equal monthly payments beginning on January 22, 2001, and continuing on the
22nd day of each month thereafter until January 22, 2002, when the remaining
principal and interest due under this Note shall be paid in full.
2. Subordination. The indebtedness evidenced by this Note is subordinated
and junior in right of payment to the prior payment of the secured Senior
Indebtedness of the Company. "Senior Indebtedness" means all indebtedness of the
Company due and owing to Finova Capital Corporation. The term "Senior
Indebtedness" also means any lender who provides an operating line of credit
loan to the Company to pay off the loan due and owing to Finova Capital
Corporation. Upon occurrence of an event of default under the Senior
Indebtedness, Company shall suspend making any payments to Lender, and Company
shall not resume making payments to the holder of this Note until the Senior
Indebtedness has been paid in full. Concurrently with the execution and delivery
of this Note, Lender shall execute and deliver to Finova Capital Corporation its
form of Subordination and Standstill Agreement.
1
<PAGE>
3. Conversion. Lender shall have the right, exercisable at any time prior
to maturity upon written notice to Company, to convert the principal amount
hereof into (a) shares of the Common Stock of the Company, at the conversion
price of $0.0644 (the "Conversion Price") of principal due under this Note for
one (1) frilly paid and nonassessable share of Common Stock; and (b) .1041
shares of Series B Preferred Stock for each share of Common Stock received in
this conversion. Except as otherwise expressly set forth below to the contrary
in relation to the issuance of additional Shares, in the event there is any
change in the number of issued and outstanding shares of stock of the Company
due to the declaration of stock dividends or through merger, consolidation or
recapitalization resulting in stock split-ups or combinations or exchanges of
shares or otherwise, the number of shares of Common Stock of the Company and/or
Series B Preferred Stock into which the principal amount of this Note may be
converted and the Conversion Price shall be adjusted proportionately by the
Company. If after the date of this Note and prior to Lender's exercise of its
conversion rights, the Company issues any class of Common or Preferred Stock or
securities convertible into or carrying a right to acquire Common Stock of the
Company ("Shares"), excluding any shares of Common Stock or Series B Preferred
Stock issued pursuant to any options, conversion rights, warrants or other
agreements in effect prior to the date of this Note, which are exercisable at a
price of $.89 per share or less, and also excluding the conversion rights
granted to other holders of the Eight Percent Secured Convertible Subordinated
Notes issued by Lender for any tranche of the aggregate maximum principal amount
of $275,160.00 (including the principal amount of this Note), then Lender is
granted a preemptive right to purchase additional shares of Common Stock of the
Company equal to its Pro Rata Share of such Shares, which must be exercised
concurrently with Lender's conversion of the principal amount of this Note to
Common Stock and Series B Preferred Stock of the Company. The term "Pro Rata
Share" means nineteen and six-tenths percent (19.6%). Lender shall pay the
Conversion Price for the Common Stock issued to Lender as its Pro Rata Share of
the Shares concurrently with conversion of the principal amount of this Note to
Common Stock and Series B Preferred Stock of the Company. As a condition to
issuance of the Common Stock and Series B Preferred Stock to Lender pursuant to
this Section 3, Lender and Company shall execute and deliver a Registration
Rights Agreement in the form delivered to Lender prior to or concurrently with
delivery of this Note.
4. Collateral. The indebtedness due under this Note is secured by the
Subordinated Security Agreement executed and delivered by Company
contemporaneously herewith.
5. Default. Each of the following shall constitute an event of default
under this Note:
(a) Failure of the Company to pay any installment of interest or
principal when due or payable, which is not cured within twenty (20) days after
written notice to Company;
(b) Levy or execution against any material property of Company, which
levy or execution is not released or discharged within thirty (30) days;
(c) Appointment of a receiver for any material part of the property of
Company, assignment for the benefit of creditors by Company, commencement of any
proceeding under any bankruptcy or insolvency laws, or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganization, composition or
extension, by or against Company; or
2
<PAGE>
(d) The occurrence of any event of default under the promissory
note(s) and related loan documents for the Senior Indebtedness.
6. Remedies. Upon the occurrence of any event of default, Lender shall have
the rights and remedies of a secured party under the Uniform Commercial Code of
Oregon. In addition, Lender may declare the entire outstanding principal balance
and accrued interest to be immediately due and payable by giving written notice
to the Company specifying such default. In the event this Note is declared to be
due and payable in frill, Lender shall be entitled to payment under this Note
after payment in frill of principal and interest on any Senior Indebtedness
outstanding at such time has been made.
7. Waiver. No recourse shall be had for payment of the principal of; or the
interest upon, this Note or for any claim based hereon, or otherwise, against
any incorporator, shareholder, officer, director or attorney, either directly by
reason of any matter prior to delivery of this Note, or otherwise, all such
liability, by the acceptance hereof as a part of the consideration of the issue
hereof; being expressly waived.
8. Notices. Any and all notices, demands or other communications required
or desired to be given hereunder by any party shall be in writing and shall be
validly given or made to the other party if it is served personally; deposited
in the United States mail, certified or registered, postage prepaid, return
receipt requested; sent by facsimile (with verbal verification of complete
receipt); or sent by a nationally recognized overnight courier. If such notice,
demand or other communication is served personally or by facsimile (with verbal
verification of complete receipt), notice shall be conclusively deemed made at
the time of such personal service or facsimile transmission. If such notice,
demand or other communication is given by mall, such notice shall be
conclusively deemed given seventy-two (72) hours after the deposit thereof in
the United States mall addressed to the party to whom such notice, demand or
other communication is to be given as hereinafter set forth. If such notice,
demand or communication is given by courier, such notice shall be conclusively
deemed given on the date of delivery according to the records of such courier.
All notices shall be sent to the parties' address set forth as follows:
If to Lender: Richard A. Kreitzberg
3332 El Dorado LP. S.
Salem, OR 97302
If to Company: Creative Medical Development, Inc.
975 SE Sandy Blvd.
Portland, OR 97214
Facsimile: (503) 230-9002
With a copy to: Mark R. Wada
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison Street, Suite 600
Portland, Oregon 97204
Facsimile: (503) 228-1741
Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given in
the manner provided hereby to the other party or parties hereto.
3
<PAGE>
9. Governing Law. The issuance, validity, interpretation, and enforcement
of this Note shall be governed by the laws of the State of Oregon.
10. Attorney's Fees. If any arbitration or legal proceeding is brought to
enforce or interpret any of the provisions of this Note or to recover any monies
due hereunder, the prevailing party shall be entitled to recover from the losing
party reasonable attorney's fees and costs incurred in such arbitration, at
trial and in any appeal.
11. Arbitration. The binding arbitration agreement of the parties contained
in the Security Agreement is hereby incorporated by this reference and shall
apply in all respects to all disputes, controversies or claims relating to or
arising out of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed the 22nd day of January, 1999.
COMPANY: CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
--------------------------------------
Title: VP Finance & Treasurer
-----------------------------------
LENDER:
/s/ Richard A. Kreitzberg
-----------------------------------------
Name: Richard A Kreitzberg
4
EXHIBIT 10.17
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS.
THIS NOTE IS SUBORDINATED TO THE LOAN OBLIGATIONS DUE TO FINOVA CAPITAL
CORPORATION PURSUANT TO A SUBORDINATION AND STANDSTILL AGREEMENT EXECUTED AND
DELIVERED BY LENDER.
CREATIVE MEDICAL DEVELOPMENT, INC.
Eight Percent Secured Convertible Subordinated Note
Due January 22, 2004
CREATIVE MBDICAL DEVELOPMENT, INC., hereinafter referred to as the
"Company," for value received, hereby promises to pay to Edward S. Smith
("Lender"), at 142 5. Cornell Ct., Lake Oswego, Oregon 97034, or such other
place as the holder of this Note may designate in writing from time to time, in
lawful money of the United States of America the principal sum of Thirty
Thousand Dollars ($30,000.00), together with interest on the outstanding
principal balance at the rate of eight percent (8%) per annum.
1. Payments. Company shall pay to Lender monthly payments of interest
beginning on February 22,1999 and continuing on the 22nd day of each month
thereafter until the principal balance has been either paid in lull or converted
to Common Stock and Series B Preferred Stock pursuant to Section 4 hereof.
Except as otherwise set forth herein, the entire principal balance is due and
payable on January 22, 2004. Company shall have no right to prepay this Note
unless Lender in its sole discretion consents thereto or, on or after the third
anniversary of this Note, Company has given Lender written notice of its intent
to prepay all or any portion of the principal balance of this Note which has not
been converted pursuant to Section 4 of this Note at least sixty (60) days prior
to the prepayment. If Lender notifies Company in writing at least sixty (60)
days prior to the second anniversary of this Note of the exercise of this option
to accelerate repayment of this Note, Company shall pay to Lender the principal
and interest due under this Note, amortized over a one year period, in twelve
(12) equal monthly payments beginning on January 22, 2001, and continuing on the
22nd day of each month thereafter until January 22, 2002, when the remaining
principal and interest due under this Note shall be paid in full.
2. Subordination. The indebtedness evidenced by this Note is subordinated
and junior in right of payment to the prior payment of the secured Senior
Indebtedness of the Company. "Senior Indebtedness" means all indebtedness of the
Company due and owing to Finova Capital Corporation. The term "Senior
Indebtedness" also means any lender who provides an operating line of credit
loan to the Company to pay off the loan due and owing to Finova Capital
Corporation. Upon occurrence of an event of default under the Senior
Indebtedness, Company shall suspend making any payments to Lender, and Company
shall not resume making payments to the holder of this Note until the Senior
Indebtedness has been paid in lull. Concurrently with the execution and delivery
of this Note, Lender shall execute and deliver to Finova Capital Corporation its
form of Subordination and Standstill Agreement.
1
<PAGE>
3. Conversion. Lender shall have the right, exercisable at any time prior
to maturity upon written notice to Company, to convert the principal amount
hereof into (a) shares of the Common Stock of the Company, at the conversion
price of $0.0644 (the "Conversion Price") of principal due under this Note for
one (1) fully paid and nonassessable share of Common Stock; and (b) .1041 shares
of Series B Preferred Stock for each share of Common Stock received in this
conversion. Except as otherwise expressly set forth below to the contrary in
relation to the issuance of additional Shares, in the event there is any change
in the number of issued and outstanding shares of stock of the Company due to
the declaration of stock dividends or through merger, consolidation or
recapitalization resulting in stock split-ups or combinations or exchanges of
shares or otherwise, the number of shares of Common Stock of the Company and/or
Series B Preferred Stock into which the principal amount of this Note may be
converted and the Conversion Price shall be adjusted proportionately by the
Company. If after the date of this Note and prior to Lender's exercise of its
conversion rights, the Company issues any class of Common or Preferred Stock or
securities convertible into or carrying a right to acquire Common Stock of the
Company ("Shares"), excluding any shares of Common Stock or Series B Preferred
Stock issued pursuant to any options, conversion rights, warrants or other
agreements in effect prior to the date of this Note, which are exercisable at a
price of $.89 per share or less, and also excluding the conversion rights
granted to other holders of the Eight Percent Secured Convertible Subordinated
Notes issued by Lender for any tranche of the aggregate maximum principal amount
of$275,160.00 (including the principal amount of this Note), then Lender is
granted a preemptive right to purchase additional shares of Common Stock of the
Company equal to its Pro Rata Share of such Shares, which must be exercised
concurrently with Lender's conversion of the principal amount of this Note to
Common Stock and Series B Preferred Stock of the Company. The term "Pro Rata
Share" means four and eight-tenths percent (4.8%). Lender shall pay the
Conversion Price for the Common Stock issued to Lender as its Pro Rata Share of
the Shares concurrently with conversion of the principal amount of this Note to
Common Stock and Series B Preferred Stock of the Company. As a condition to
issuance of the Common Stock and Series B Preferred Stock to Lender pursuant to
this Section 3, Lender and Company shall execute and deliver a Registration
Rights Agreement in the form delivered to Lender prior to or concurrently with
delivery of this Note.
4. Collateral. The indebtedness due under this Note is secured by the
Subordinated Security Agreement executed and delivered by Company
contemporaneously herewith.
5. Default. Each of the following shall constitute an event of default
under this Note:
(a) Failure of the Company to pay any installment of interest or
principal when due or payable, which is not cured within twenty (20) days after
written notice to Company;
(b) Levy or execution against any material property of Company, which
levy or execution is not released or discharged within thirty (30) days;
(c) Appointment of a receiver for any material part of the property of
Company, assignment for the benefit of creditors by Company, commencement of any
proceeding under any bankruptcy or insolvency laws, or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganization, composition or
extension, by or against Company; or
2
<PAGE>
(d) The occurrence of any event of default under the promissory
note(s) and related loan documents for the Senior Indebtedness.
6. Remedies. Upon the occurrence of any event of default, Lender shall have
the rights and remedies of a secured party under the Uniform Commercial Code of
Oregon. In addition, Lender may declare the entire outstanding principal balance
and accrued interest to be immediately due and payable by giving written notice
to the Company specifying such default. In the event this Note is declared to be
due and payable in lull, Lender shall be entitled to payment under this Note
after payment in lull of principal and interest on any Senior Indebtedness
outstanding at such time has been made.
7. Waiver. No recourse shall be had for payment of the principal of; or the
interest upon, this Note or for any claim based hereon, or otherwise, against
any incorporator, shareholder, officer, director or attorney, either directly by
reason of any matter prior to delivery of this Note, or otherwise, all such
liability, by the acceptance hereof as a part of the consideration of the issue
hereof; being expressly waived.
8. Notices. Any and all notices, demands or other communications required
or desired to be given hereunder by any party shall be in writing and shall be
validly given or made to the other party if it is served personally; deposited
in the United States mail, certified or registered, postage prepaid, return
receipt requested; sent by facsimile (with verbal verification of complete
receipt); or sent by a nationally recognized overnight courier. If such notice,
demand or other communication is served personally or by facsimile (with verbal
verification of complete receipt), notice shall be conclusively deemed made at
the time of such personal service or facsimile transmission. If such notice,
demand or other communication is given by mail, such notice shall be
conclusively deemed given seventy-two (72) hours after the deposit thereof in
the United States mail addressed to the party to whom such notice, demand or
other communication is to be given as hereinafter set forth. If such notice,
demand or communication is given by courier, such notice shall be conclusively
deemed given on the date of delivery according to the records of such courier.
All notices shall be sent to the parties' address set forth as follows:
If to Lender: Edward S. Smith
142 5. Cornell Ct.
Lake Oswego, OR 97034
If to Company: Creative Medical Development, Inc.
975 SE Sandy Blvd.
Portland, OR 97214
Facsimile: (503) 230-9002
With a copy to: Mark R. Wada
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison Street, Suite 600
Portland, Oregon 97204
Facsimile: (503) 228-1741
3
<PAGE>
Any party hereto may change its address for the purpose of receiving notices,
demands and other communications as herein provided by a written notice given in
the manner provided hereby to the other party or parties hereto.
9. Governing Law. The issuance, validity, interpretation, and enforcement
of this Note shall be governed by the laws of the State of Oregon.
10. Attorney's Fees. If any arbitration or legal proceeding is brought to
enforce or interpret any of the provisions of this Note or to recover any monies
due hereunder, the prevailing party shall be entitled to recover from the losing
party reasonable attorney's fees and costs incurred in such arbitration, at
trial and in any appeal.
11. Arbitration. The binding arbitration agreement of the parties contained
in the Security Agreement is hereby incorporated by this reference and shall
apply in all respects to all disputes, controversies or claims relating to or
arising out of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed the 22nd day of January, 1999
COMPANY: CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
--------------------------------------
Title: VP Finance & Treasurer
-----------------------------------
LENDER: /s/ Edward S. Smith
------------------------
Name: Edward S. Smith
4
EXHIBIT 10.18
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT ("Agreement") is made and entered into
this 22nd day of January, 1999, by and among CREATIVE MEDICAL DEVELOPMENT, INC.,
a Delaware corporation ("CMDI"), and EDWARD S. SMITH (the "Note Holder").
RECITALS
WHEREAS, CMDI is issuing to the Note Holder a Secured Convertible
Subordinated Note ("Note") and desires to grant to the Note Holder certain
registration rights for CMDI's Common Stock which may be issued upon conversion
of the Note. The Note is being issued to the Note Holder pursuant to an
Agreement (the "Agreement") and Affidavit and Agreement of Prospective Investor
("Affidavit"), between CMDI and the Note Holder.
AGREEMENT
NOW, THEREFORE, in consideration of the premises set forth herein, the
agreements herein expressed, and for other good and valuable consideration, the
parties hereto hereby agree as follows:
1. Registration Rights. CMDI covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or ordering of effectiveness of such registration
statement or document.
(b) The term "Registrable Securities" means CMDI Common Stock to be issued
upon conversion of the shares of the Note, and any other shares of CMDI Common
Stock issued solely in respect of such Note (because of conversion rights under
the Series B Preferred Stock, stock splits, stock dividends, reclassifications,
recapitalizations or similar events).
(c) The number of shares of "Registrable Securities then outstanding" shall
be determined by the number of shares of Common Stock outstanding that are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities that upon issuance would be, Registrable Securities.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities, and each of such party's respective successors
and assigns who has delivered to CMDI a signed counterpart of this Agreement.
1
<PAGE>
1.2 Company Registration. If (but without any obligation to do so) CMDI
proposes to register any of its Common Stock under the Act in connection with a
public offering of such securities (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, or a
registration for the issuance of securities in the acquisition of another entity
or its assets, or for any other limited purpose), CMDI shall give the Holder
written notice (the "Notice") of such registration at least 45 days prior to the
effectiveness of the registration statement covering the Common Stock being
offered. Upon the written request of the Holder given to CMDI within twenty (20)
days after the mailing of such Notice by CMDI, CMDI shall, subject to the
provisions of Section 1.6 hereof, use its best efforts to cause to be registered
under the Act all of the Registrable Securities that such Holder has requested
to be registered. The Holder's rights under this Section 1.2 may be exercised an
unlimited number of times.
1.3 Obligations of CMDI. Whenever required under this Section 1 to effect
the registration of any Registrable Securities, CMDI shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the United States Securities and Exchange
Commission ("SEC") a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holders of a majority of the
Registrable Securities registered thereunder, keep such registration statement
effective for up to one hundred twenty (120) days.
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to keep the registration statement
effective for the period stated in Section 1.3(a) above, and to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holder such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the requirements of the Act, and
such other documents as he may reasonably request in order to facilitate the
public sale or other disposition of Registrable Securities owned by him.
(d) Use its best efforts to register and qualify' the securities covered by
such registration statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder, provided that CMDI
shall not be required in connection therewith or as a condition thereto to
qualify' to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Holder shall also enter
into and perform its obligations under such an agreement.
(f) Notify the Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto covered by
such registration statement is required to be delivered under the Act of the
2
<PAGE>
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
circumstances then existing.
(g) Promptly notify the Holder of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement (or the initiation of
any formal proceeding for that purpose) or of the receipt by CMDI of any
notification with respect to suspension of the qualification of Registrable
Securities for sale in any jurisdiction (or the initiation of any formal
proceeding for that purpose) or of the receipt by C~{DI of any notification with
respect to the suspension of the qualification of Registrable Securities for
sale in any jurisdiction (or the initiation of any formal proceeding for that
purpose). CMDI shall make reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of a registration statement hereunder or any
post-effective amendment thereto at the earliest practicable date.
1.4 Furnish Information. It shall be a condition precedent to the
obligations of CMDI to take any action pursuant to this Section 1 with respect
to the Registrable Securities of any selling Holder, that such Holder shall
furnish to CMDI such information regarding it, the Registrable Securities held
by it, and the intended method of disposition of such securities as shall be
required to effect the registration of such Holder's Registrable Securities and
to execute such documents in connection with such registration as CMDI may
reasonably request.
1.5 Expenses of Company Registration. All expenses (other than underwriting
discounts, commissions and stock transfer taxes relating to Registrable
Securities, and any fees and expenses of special counsel for the selling
shareholders in the registration, which expenses shall be borne by the selling
shareholders in proportion to the number of shares sold by each selling Holder
or as shall otherwise be agreed to by such selling Holders) incurred in
connection with registrations, filings or qualifications pursuant to this
Section 1, including without limitation all registration, filing and
qualification fees, printers and accounting fees, fees and disbursements of
counsel for CMDI, shall be borne by CMDI.
1.6 Underwriting Requirements. In connection with any offering involving an
underwriting of shares of capital stock being issued by CMDI, CMDI shall not be
required under this Section 1 to include any of the Holder's securities in such
underwriting unless the Holder agrees to sell such Holder's Registrable
Securities on the basis provided in the underwriting agreement approved by CMDI
and the underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by CMDI.
If the managing underwriter of the offering shall advise C~MDI that inclusion in
the registration statement of the Registrable Securities would, in such managing
underwriter's opinion, interfere with CMDI's proposed distribution of its Common
Stock or other securities which are not owned by the Holder, then the
underwriters may exclude all or a portion of the Registrable Securities so
requested to be included in such registration.
1.7 Delay of Registration. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
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1.8 Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 1:
(a) To the extent permitted by law, CMDI will indemnify' and hold harmless
the Holder, any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"),
against any losses, claims damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"); (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, but excluding any untrue
statement or alleged untrue statement in any preliminary prospectus which is
cured by a later amendment or supplement thereto, or in the final prospectus
related thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; and CMDI will pay to the Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this subsection 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of CMDI (which consent shall not be
unreasonably withheld), nor shall CMDI be liable in any such case for any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon a Violation that occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter, or controlling person.
(b) To the extent permitted by law, Holder will indemnify and hold harmless
CMDI, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls CMDI within the
meaning of the Act, each agent and any underwriter and any officer, director, or
controlling person of any such underwriter against any losses, claims, damages,
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by the Holder or its agents expressly or used in connection with such
registration; and Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.8(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 1.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; and provided further, that, in no event shall any
indemnity under this subsection 1.8(b) exceed the gross proceeds from the
offering received by Holder.
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(c) Promptly after receipt by an indemnified party under this Section 1.8
of notice of the commencement of any action (including governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 1.8, deliver to the indemnifying party
a written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party (together with all other indemnified parties
that may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with reasonable fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 1.8, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 1.8. No indemnifying party, in the
defense of any claim or litigation shall, except with the consent of each
indemnified party, consent to the entry of judgment or enter into any settlement
which does not include as an unconditional term thereof a release from all
liability with respect to such claim or litigation.
(d) The obligations of CMDI and Holder under this Section 1.8 shall survive
the completion of any offering of Registrable Securities in a registration
statement under this Section 1, and otherwise.
1.9 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holder the benefits of Rule 144 promulgated under the Act any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of CMDI to the public without registration, CMDI agrees to do the
following:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) file with the SEC in a timely manner all reports and other documents
required of CMDI under the Act and the 1934 Act; and
(c) furnish to Holder forthwith upon request, so long as the Holder owns
any Registrable Securities, (i) a written statement by CMDI that it has complied
with the reporting requirements of SEC Rule 144, (ii) a copy of the most recent
annual or quarterly report of CMDI and such other reports and documents filed by
CMDI with the SEC, and (iii) such other information as may be reasonably
requested in availing Holder of any rule or regulation of the SEC that permits
the selling of any such securities without registration.
1.10 "Market Stand-Off' Agreement. Holder hereby agrees that, during the
period specified by CMDI and an underwriter of common stock or other securities
of CMDI (such period not to exceed 180 days), from the 14-day period preceding
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or the period following the effective date of a registration statement of CMDI
filed under the Act, it shall not, to the extent reasonably requested by CMDI
and such underwriter, directly or indirectly sell, offer to sell, contract to
sell, grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of CMDI held by
it at any time during such period except common stock included in such
registration. In order to enforce the foregoing covenant, CMDI may impose
stop-transfer instructions with respect to the Registrable Securities of Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period. The restrictions set forth above
shall not apply to registration statements relating solely to the issuance of
securities to participants in a CMDI stock plan or a registration for the
issuance of securities in the acquisition of another entity or its assets.
1.11 Assignment of Registration Rights. The right to cause CMDI to register
Registrable Securities pursuant to this Section 1 may be assigned to any
permitted transferee of the Note or Registrable Securities.
1.12 Other Registration Rights. CMDI shall not grant to any party any
rights, which are pari passu or superior to the rights contained in this
Agreement, to require CMDI to register any equity securities of CMDI or any
securities convertible or exchangeable into or exercisable for equity securities
of CNDI, without the written consent of Holder and the other holders of the same
series of notes issued to Holder representing in the aggregate more than fifty
percent (50%) of the Registrable Securities then outstanding.
2. Term. CMDI's obligations to register the Registrable Securities in
accordance with the terms and conditions of this Agreement shall terminate
twenty (20) years from the date of this Agreement unless extended by mutual
agreement of CMDI and the Holder.
3. Miscellaneous.
3.1 Successors and Assigns. Subject to Section 1.11 hereof, the terms and
conditions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their permitted successors and assigns
(including without limitation the administrators, executors, representatives,
heirs, legatees and devisees of the Note Holders), and any reference to such a
party hereto shall also be a reference to permitted successors or assigns.
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement. No assignment or
transfer by CMDI or the Note Holder of their respective rights and obligations
hereunder shall be made, except to the limited extent permitted by Section 1.11
hereof. Notwithstanding the foregoing, this Agreement shall be binding, in
accordance with its terms, upon any successor of CMDI, by virtue of a merger,
consolidation, sale of assets or otherwise, of CMDI.
3.2 Governing Law. The laws of the State of Oregon (irrespective of its
choice of law principles) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the rights
and duties of the parties.
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3.3 Notices. Whenever any party hereto desires or is required to give any
notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, or sent by prepaid overnight courier or confirmed telecopier,
addressed as follows:
If to CMDI:
Creative Medical Development, Inc.
975 SE Sandy Blvd.
Portland, OR 97214
Telecopier Number (503) 230-9002
Attention: M. Charles Van Rossen
With a copy to:
Mark R. Wada, Esq.
Farleigh, Wada & Witt, P.C.
121 S.W. Morrison, Suite 600
Portland, Oregon 97204
Telecopier Number: (503) 228-1741
If to the Note Holder:
Edward S. Smith
142 5. Cornell Ct.
Lake Oswego, OR 97304
Such communications shall be effective when they are received by the addressee
thereof Any party may change its address or telecopier number for such
communications by giving notice thereof to the other parties in conformity with
this Section.
3.4 Severability. If any provisions of this Agreement, or the application
thereof, shall for any reason or to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances shall continue in frill force and effect and in no way be
affected, impaired, or invalidated.
3.5 Amendments and Waivers. Any term or provision of this Agreement may be
amended, and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only by a writing signed by CMDI and the holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this Section 3.5 shall be binding on Holder at the time
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outstanding, each future Holder of such Registrable Securities, and CMDI. The
waiver by a party of any breach hereof or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
3.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WI~REOF, the parties hereto have executed this Agreement as of
the date first above.
CMDI: NOTE HOLDER:
CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
Title: VP Finance & Treasurer Edward S. Smith
8
SUBORDINATED SECURITY AGREEMENT
January 22, 1999
1. CREATIVE MEDICAL DEVELOPMENT, INC., a Delaware corporation ("Debtor"),
hereby grants to Edward S. Smith, the holder of the Secured Convertible
Subordinated Note dated January22, 1999 ("Secured Party"), to secure payment and
performance of all Liabilities of Debtor to Secured Party, a security interest
in the following described personal property, whether now owned or hereafter
acquired:
All property of Debtor, whether now owned or hereafter acquired, together
with all additions thereto and accessions thereof including, without
limitation, each of the following: (i) accounts, (ii) Debtor's books, (iii)
equipment, (iv) general intangibles, (v) goods, (vi) inventory, (vii)
instruments, (viii) chattel paper, and the proceeds and products, whether
tangible or intangible, of any of the foregoing,
2. Definitions. As herein used:
2.1 "Collateral" means all property of Debtor which Secured Party now
has, by this agreement acquires or hereafter acquires a security interest in,
lien upon or assignment of.
2.2 "Liabilities" mean all obligations of Debtor under the Secured
Convertible Subordinated Note dated January 22, 1999.
2.3 Terms used in this Subordinated Security Agreement ("Agreement")
which are not herein defined and which are defined in the Uniform Commercial
Code of Oregon shall have the meaning therein set forth.
3. Debtor's Representations and Warranties. Debtor represents and warrants:
3.1 Debtor is a corporation, duly organized and existing under the
laws of the state of its incorporation and is duly qualified in every state in
which it is doing business.
3.2 The execution, delivery and performance hereof are within Debtor's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of Debtor's charter, by laws or other incorporation papers, or
of any undertaking to which Debtor is a party or by which it is bound.
3.3 Except for the security interest of Secured Party therein, the
security interests of Additional Lenders defined in Section 11 and the prior
security interest in favor of Finova Capital Corporation (fka Greyhound
Financial Corporation, and hereinafter referred to as "Finova") pursuant to a
Loan and Security Agreement dated April 26, 1994, as amended from time to time
(the "Finova Agreement"), Debtor is, and as to Collateral acquired after the
date hereof, Debtor shall and will be the owner of such Collateral free from any
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lien, security interest, encumbrance or other right, title or interest of any
other person, firm or corporation, and Debtor shall defend the Collateral
against all claims and demands of all persons at any time claiming the same or
any interest therein adverse to Secured Party.
3.4 Except for financing statements relating to the security interest
granted pursuant to the Finova Agreement and those granted to Additional
Lenders, there is no financing statement now on file in any public office
covering any Collateral subject to the security of Secured Party herein, or
intended so to be, or in which Debtor is named as or signs as a debtor or
consignee, and so long as Debtor has any Liabilities to Secured Party, Debtor
will not execute and there will not be on file in any public office any
financing statements, except the financing statement filed or to be filed with
respect to the security interest hereby granted to Secured Party, and except as
expressly agreed in writing by Secured Party.
3.5 Debtor shall give Secured Party written notice of the location of
each place of business it has, and of its chief executive office if it has more
than one place of business. Except as such notice is given, Debtor's chief
executive office and only place of business shall be at Debtor's address as it
appears at the beginning of this agreement.
4. Uniform Commercial Code. To the extent applicable, the Uniform
Commercial Code of Oregon shall govern security interests provided for herein
and the construction, validity, and performance of this agreement shall be
governed by the law of Oregon. If, by reason of location of Collateral or
otherwise, the creation, validity or perfection of security interests provided
for herein are governed by the law or a jurisdiction other than Oregon, Debtor
agrees to take such action and execute and deliver such papers as Secured Party
may from time to time request to comply with such law. Debtor agrees to execute
and deliver financing statements, and other papers to Secured Party, deliver
instruments, documents, securities and other Collateral to Secured Party and
take all other actions requested by Secured Party to enable Secured Party to
perfect or otherwise protect and enforce its security interest in or lien on
Collateral. Debtor agrees that a photocopy or other reproduction of the security
agreement or any financing statement executed by Debtor pursuant to this
agreement is sufficient as a financing statement.
5. Default. Any or all of the Liabilities shall, at Secured Party's option,
be immediately due and payable upon the occurrence of any of the following
events of default: (a) default in the payment or performance, when due or
payable, of any Liabilities which is not cured within twenty (20) days after
written notice to Debtor; (b) levy or execution against any material property of
Debtor, which levy or execution is not released or discharged within thirty (30)
days; or (c) appointment of a receiver for any material part of the property of
Debtor, assignment for the benefit of creditors by Debtor, commencement of any
proceeding under any bankruptcy or insolvency laws, or any laws relating to the
relief of debtors, readjustment of indebtedness, reorganization, composition or
extension, by or against Debtor.
6. Remedies. Upon the occurrence of any of the above events of default and
at any time thereafter (such default not having previously been cured), Secured
Party shall have the rights and remedies of a secured party under the Uniform
Commercial Code of Oregon.
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7. Waivers. Debtor waives demand, notice, protest, notice of acceptance of
this agreement, notice of loans made, credit extended, Collateral received or
delivered or other action taken in reliance hereon and all other demands and
notices of any description. With respect both to Liabilities and Collateral,
Debtor assents to any extension or postponement of the time of payment or any
other indulgence, to any substitution, exchange or release of Collateral, to the
addition or release of any party or person primarily or secondarily liable, to
the acceptance of partial payments thereon and the settlement, compromising or
adjusting of any thereof all in such manner and at such time or times as Secured
Party may deem advisable. Secured Party shall have no duty as to the collection
or protection of Collateral or any income thereon, nor as to the preservation of
rights pertaining thereto beyond the safe custody thereof Secured Party may
exercise its rights with respect to Collateral without resorting to or regard to
other Collateral or sources of reimbursement for Liabilities. Secured Party
shall not be deemed to have waived any of its rights upon or under Liabilities
or Collateral unless such waiver be in writing and signed by Secured Party. No
delay or omission on the part of Secured Party in exercising any right shall
operate as a waiver of such right or any other right. A waiver on any one
occasion shall not be construed as a bar to or waiver of any right on any future
occasion. All rights and remedies of Secured Party on Liabilities or Collateral
whether evidenced hereby or by any other instrument or papers shall be
cumulative and may be exercised singularly or concurrently.
8. Attorneys' Fees and Costs. The Secured Party shall be entitled to
recover reasonable expenses of every kind and description, including reasonable
attorney fees, in connection with suit or action or arbitration in both trial
and appellate courts, paid or incurred by Secured Party under or with respect to
Liabilities or Collateral, collection or realization of Liabilities or in
protecting or enforcing its rights upon or under Liabilities or Collateral or
this agreement, or in taking, holding, preparing for sale and selling any of the
Collateral. Payment thereof is secured by Collateral. After deducting all of
said expenses, the residue of any proceeds of collection or sale of Collateral
shall be applied to the payment of principal or interest on Liabilities in such
order of preference as Secured Party may determine.
9. Notices. Any demand upon or notice to Debtor that Secured Party may
elect to give shall be effective when deposited in the United States mall or
sent by facsimile or delivered to an air courier company addressed to Debtor at
the address shown at the beginning of this agreement, or, if Debtor has notified
Secured Party in writing of a change of address, to Debtor's last address so
notified. Demands or notices addressed to Debtor's address at which Secured
Party customarily communicates with Debtor shall also be effective.
10. Binding Arbitration. Upon the demand of any party any controversy or
claim arising out of or relating to this Agreement, including, without
limitation, the making, performance, or interpretation of this Agreement, shall
be settled by arbitration. Unless otherwise agreed, the arbitration shall be
conducted in Portland, Oregon, in accordance with the then-current Commercial
Arbitration Rules of the American Arbitration Association. The arbitration shall
be held before a single arbitrator (unless otherwise agreed by the parties). The
arbitrator shall be chosen from a panel of attorneys knowledgeable in the field
of business law in accordance with the then-current Commercial Arbitration Rules
of the American Arbitration Association. If the arbitration is commenced, the
parties agree to permit discovery proceedings of the type provided by the Oregon
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Rules of Civil Procedure both in advance of, and during recesses of, the
arbitration hearings. The parties agree that the arbitrator shall have no
jurisdiction to consider evidence with respect to or render an award or judgment
for punitive damages (or any other amount awarded for the purpose of imposing a
penalty). The parties agree that all facts and other information relating to any
arbitration arising under this Agreement shall be kept confidential to the
fullest extent permitted by law. The prevailing Party in any Dispute shall be
entitled to recover its reasonable attorneys' fees in any arbitration, and the
arbitrator shall have the power to award such fees. The award of the arbitrator
shall be in writing and shall set forth the factual and legal basis for the
award. All statutes of limitation applicable to any dispute shall apply to any
proceeding in accordance with this arbitration clause. The parties agree, to the
maximum extent practicable, to take any action necessary to conclude an
arbitration hereunder within 180 days of the filing of a dispute. The arbitrator
shall be empowered to impose sanctions for any party's failure to proceed within
the times established herein. The provisions of this arbitration provision shall
survive any termination, amendment, or expiration hereof or of this Agreement
unless the Parties otherwise expressly agree in writing. Each Party agrees to
keep all disputes and arbitration proceedings strictly confidential, except for
disclosures of information required in the ordinary course of business of the
parties or as required by applicable law or regulation. If any provision of this
arbitration provision is declared invalid by any court, the remaining provisions
shall not be affected thereby and shall remain fully enforceable. THE PARTIES
UNDERSTAND THAT BY THIS AGREEMENT THEY HAVE DECIDED THAT THEIR DISPUTES SHALL BE
RESOLVED BY BINDING ARBITRATION RATHER THAN IN COURT, AND ONCE DECIDED BY
ARBITRATION NO DISPUTE CAN LATER BE BROUGHT, FILED OR PURSUED IN COURT.
I. Equal Priority of Security Interest. Debtor intends to issue Eight
Percent Secured Convertible Subordinated Notes in the aggregate maximum
principal amount of $275, 160.00 (including the principal amount of this Secured
Party's Note) to certain parties (such other parties shall be referred to as
"Additional Lenders") on terms substantially similar to the terms between
Secured Party and Debtor. The security interest granted by this Agreement
secures the Liabilities to the Secured Party on an equal, or pari passu, basis
with the security interests granted to the Additional Lenders, such that the
Secured Party's and Additional Lenders' security interests in the Collateral
shall rank equally with each other's security interest in the Collateral
regardless of the date of filing of each party's financing statement.
12. Subordination to Finova and its Successor. The security interest
granted to each Secured Party hereunder is subordinate and junior in priority to
the first priority security interest granted to Finova Capital Corporation.
Concurrently with the execution and delivery of this Agreement, each Secured
Party shall execute and deliver to Finova Capital Corporation its form of
Subordination and Standstill Agreement. Each Secured Party agrees that the
security interest granted by this Agreement shall also be subordinate and junior
to any security interest in favor of a lender who provides an operating line of
credit loan to the Debtor to pay off or refinance the loan due and owing to
Finova Capital Corporation. Secured Party shall, at the request of Debtor, take
all reasonable actions requested by Debtor to evidence such subordination,
including, without limitation, execution of a subordination agreement
substantially similar to the Subordination and Standstill Agreement.
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Debtor and Secured Party hereby acknowledge receipt of a copy of this
Agreement.
DEBTOR:
CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
Title: VP Finance & Treasurer
SECURED PARTY:
Edward S. Smith
5
EXHIBIT 10.20
ADDENDUM TO
SUBORDINATED SECURITY AGREEMENT
This ADDENDUM TO SUBORDINATED SECURITY AGREEMENT is entered into as of
January 22, 1999, by and between CREATIVE MEDICAL DEVELOPMENT, INC. ("Debtor")
and WILLIAM E. COOK ("Secured Party").
1 On October 24, 1998, the parties executed a Subordinated Security
Agreement (the "Subordinated Security Agreement").
2 Continued Effectiveness. Except as expressly modified by this
Addendum, all terms, conditions, agreements, and covenants set forth in the
Subordinated Security Agreement, are hereby ratified and confirmed and shall
continue in full force and effect.
3 Defined Terms. Unless otherwise defined herein, capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in the Subordinated Security Agreement
4 Amendment of Section 11. Section 11 of the Subordinated Security
Agreement is hereby deleted and replaced with the following:
Equal Priority of Security Interest. Debtor intends to issue Eight Percent
Secured Convertible Subordinated Notes in the aggregate maximum principal
amount of $275,160.00 (including the principal amount of this Secured
Party's Note) to certain parties (such other parties shall be referred to
as "Additional Lenders") on terms substantially similar to the terms
between Secured Party and Debtor. The security interest granted by this
Agreement secures the Liabilities to the Secured Party on an equal, or pari
passu, basis with the security interests granted to the Additional Lenders,
such that the Secured Party's and Additional Lenders' security interests in
the Collateral shall rank equally with each other's security interest in
the Collateral regardless of the date of filing of each party's financing
statement.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as
of the date first set forth above.
DEBTOR:
CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
Title: VP Finance & Treasurer
SECURED PARTY:
/s/William E. Cook
EXHIBIT 10.21
ADDENDUM TO EIGHT PERCENT SECURED
CONVERTIBLE SUBORDINATED NOTE
This ADDENDUM TO EIGHT PERCENT SECURED CONVERTIBLE SUBORDINATED NOTE
is entered into as of January 22, 1999, by and between CREATIVE MEDICAL
DEVELOPMENT, INC. ("Debtor") and WILLIAM E. COOK ("Secured Party").
1. On October 24, 1998, the parties executed a Eight Percent Secured
Convertible Subordinated Note (the "Subordinated Note").
2. Continued Effectiveness. Except as expressly modified by this
Addendum, all terms, conditions, agreements, and covenants set forth in the
Subordinated Note are hereby ratified and confirmed and shall continue in fill
force and effect.
3. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them in the Subordinated Note.
4. Amendment of Section 3. Section 3 of the Subordinated Note is
hereby deleted and replaced with the following:
"3. Conversion. Lender shall have the right, exercisable at any time prior
to maturity upon written notice to Company, to convert the principal amount
hereofinto (a) shares of the Common Stock of the Company, at the conversion
price of $0.0644 (the "Conversion Price") of principal due under this Note
for one (1) fully paid and nonassessable share of Common Stock; and (b)
1041 shares of Series B Preferred Stock for each share of Common Stock
received in this conversion. Except as otherwise expressly set forth below
to the contrary in relation to the issuance of additional Shares, in the
event there is any change in the number of issued and outstanding shares of
stock of the Company due to the declaration of stock dividends or through
merger, consolidation or recapitalization resulting in stock split-ups or
combinations or exchanges of shares or otherwise, the number of shares of
Common Stock of the Company and/or Series B Preferred Stock into which the
principal amount of this Note may be converted and the Conversion Price
shall be adjusted proportionately by the Company. If after the date of this
Note and prior to Lender's exercise of its conversion rights, the Company
issues any class of Common or Preferred Stock or securities convertible
into or carrying a right to acquire Common Stock of the Company ("Shares"),
excluding any shares of Common Stock or Series B Preferred Stock issued
pursuant to any options, conversion rights, warrants or other agreements in
effect prior to the date of this Note, which are exercisable at a price of
$.89 per share or less, and also excluding the conversion rights granted to
other holders of the Eight Percent Secured Convertible Subordinated Notes
issued by Lender for any tranche of the aggregate maximum principal amount
of $275,160.00 (including the principal amount of this Note), then Lender
is granted a preemptive right to purchase additional shares of Common Stock
of the Company equal to its Pro Rata Share of such Shares, which must be
exercised concurrently with Lender's conversion of the principal amount of
this Note to Common Stock and Series B Preferred Stock of the Company. The
term "Pro Rata Share" means nineteen and six-tenths percent (19.6%). Lender
shall pay the Conversion Price for the Common Stock issued to Lender as its
1
<PAGE>
Pro Rata Share of the Shares concurrently with conversion of the principal
amount of this Note to Common Stock and Series B Preferred Stock of the
Company. As a condition to issuance of the Common Stock and Series B
Preferred Stock to Lender pursuant to this Section 3, Lender and Company
shall execute and deliver a Registration Rights Agreement in the form
delivered to Lender prior to or concurrently with delivery of this Note."
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as
of the date first set forth above.
COMPANY: CREATIVE MEDICAL DEVELOPMENT, INC
By: /s/ M. Charles Van Rossen
-----------------------------------------
Title: VP Finance & Treasurer
--------------------------------------
LENDER:
/s/ William E. Cook
-------------------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> JAN-31-1999
<CASH> 284,117
<SECURITIES> 0
<RECEIVABLES> 937,977
<ALLOWANCES> 64,849
<INVENTORY> 1,127,833
<CURRENT-ASSETS> 2,368,743
<PP&E> 3,741,493
<DEPRECIATION> 561,243
<TOTAL-ASSETS> 5,548,993
<CURRENT-LIABILITIES> 5,189,488
<BONDS> 0
0
5,869
<COMMON> 51,093
<OTHER-SE> (1,062,087)
<TOTAL-LIABILITY-AND-EQUITY> 5,548,993
<SALES> 9,101,868
<TOTAL-REVENUES> 9,101,868
<CGS> 6,719,839
<TOTAL-COSTS> 1,607,855
<OTHER-EXPENSES> (310,803)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,683
<INCOME-PRETAX> 775,294
<INCOME-TAX> 0
<INCOME-CONTINUING> 775,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775,294
<EPS-PRIMARY> .44
<EPS-DILUTED> .41
</TABLE>
